Ask the Expert: Understanding Energy

from:

http://www.ft.com/cms/s/2/a0d87696-a0e5-11dd-82fd-000077b07658.html

The energy infastructure industry faces mounting pressures. Amid fierce competition to secure supplies and to meet demand, spending on energy infastructure is set to rise sharply over the coming years. The International Energy Agency has estimated this could total $22,000bn by 2030.

But issues are emerging that make investment in infastructure projects more difficult. One is the global financial crisis, which is hitting funding of new projects, while the other is the growing pressure to build an energy system that will reduce carbon dioxide emissions to address the threat of climate change.

So will the global financial crisis hit the investment required to upgrade the world’s crumbling energy infastructure?

To coincide with the publication of the Financial Times Understanding the Energy Challenge special report, Ed Crooks, FT energy editor, and William Ramsay, former deputy executive director of the International Energy Agency and now senior fellow at the Paris-based Institut Français des Relations Internationales, took your questions on the challenges facing the energy infastructure industry. The pick of the question are answered below.

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Does the European Union have a co-ordinated energy strategy? If so, is it working? If not, why not?

Johanna Pickering, London

Ed Crooks: The good news is it does, up to a point. The bad news is that the parts that are unco-ordinated are very important, and even the co-ordinated parts are showing signs of strain. What has been co-ordinated remarkably effectively is climate change strategy, with a working emissions trading scheme and a well-developed trading market. EU governments have also agreed on some very ambitious targets for cutting emissions and boosting renewable energy. On the other hand, energy security policy is still a free-for-all, with no common stance on negotiations with Russia and other energy suppliers. And the climate change strategy is under considerable strain as the economic downturn bites, with countries such as Italy and Poland looking to lift the burden of compliance.

William Ramsay: The EU has a strategic energy strategy composed of many moving parts. The objectives are broadly to move quickly to a secure high-efficiency, low-carbon energy system. The sub-strategies of these overarching goals become quite specific. Targets have been established for greater energy efficiency, carbon reductions and the contribution of renewables to the energy mix all at 20 per cent by the year 2020 - ”20-20-20 by 2020”. These targets are reinforced by a number of directives to promote the integration of the internal EU markets for energy commodities - in gas, power, transportation, storage, etc.

Perhaps declaring the objectives will prove to be the easy part as the political challenges of dividing the burden among the 27 countries will prove more difficult. These difficult negotiations have been addressed by the third package of proposals on the internal energy market that will establish legally binding targets by country and set our many concrete measures to achieve energy efficiencies.

This programme is under discussion at a time when a great deal of new uncertainty has been introduced in global energy market by the financial crisis sweeping across all economies and by the economic slow down. While commodity prices may be falling, this has considerable downside risks for future supply, plus the lack of credit is making investments in more energy efficient equipment and new capital stock that much more difficult even if many of these investments have a short payback.

The EU has a strategy, well-enunciated and with political commitments. Implementing that strategy, already difficult has only gotten more difficult in the past few months. The October Council discussion of these issues deferred the most difficult. The French presidency has its work cut out for it.

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Could you please define the main challenges in the energy [infastructure] industry and formulate the new strategy, which, in your opinion, has to be executed to overcome the obstacles and establish the sustainable development in the global energy sector in 2009?

Viktor O. Ledenyov, Ukraine

EC: The challenges are the same as they have been for years: to put in place an infrastructure that delivers reliable energy supplies at affordable prices but does not leave the planet partially or wholly uninhabitable. The problem is that our ability to rise to that challenge is less than at any time for decades because of the economic downturn and the financial turmoil we are experiencing. The important thing will be for governments and businesses to keep their eyes on the long-term objectives, and not take too many decisions that will compromise those aims. In particular, I think there is a real leadership role for government here. Businesses can only respond to the incentives they are set, and it will be up to government to make sure that the right sorts of incentives, such as a price for carbon dioxide emissions, are in place.

WR: If you look at the probable evolution of global energy consumption, you find a world continuing to draw heavily on fossil fuels to meet its energy needs. The International Energy Agency projects that fossil fuels will continue to meet 80 per cent of energy requirements in 2030 unless we do something fairly dramatic to change that. We should not be misled by what appear to be easy solutions - e.g. biofuels or deep penetration of renewables to solve our problems. These are both valuable, but their potential contributions have to be kept in perspective.

Aside from the cyclical mismatch of supply and demand for energy, which we see reflected in high prices and geopolitical shocks to energy systems as we are seeing in Iraq or Nigeria, the real longer term challenge we confront is that we cannot afford to continue burning fossil fuels without abating their carbon emissions. That means much greater attention to prosaic things like energy efficiency - perhaps not very sexy but efficiency can provide up to 40 per cent of the solution in the next 25 years. The next most important thing is to decarbonise power generation. That means pressing forward with renewables that could supply up to 50 per cent of power by 2050, and demonstrating carbon capture and storage (CCS) to remove carbon dioxide from power plants, oil and gas production and other major stationary sources of carbon dioxide. This will require huge investments in demonstration facilities. This is doubly important because even though oil prices have come down, they are still above traditional levels. This is forcing many countries to use greater amounts of coal - which will be a major source of incremental CO2 for the next 40 years.

For the longer term, governments must reverse the decline in energy R&D spending that has collapsed from its highs in the early 1980s. Technological solutions will be needed to decarbonise the transport sector through new fuels such as second generation biofuels and hydrogen and through better equipment such as plug-in hybrid cars.

Everyone has a responsibility in meeting this challenge. The search for a post-Kyoto framework for carbon abatement offers the right opportunity to define a common strategy where everyone can shoulder their share of the burden.

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Is the lack of energy infrastructure in developing countries, such as India, not something of a blessing in that it allows them to leapfrog outdated fossil fuel energy distribution and develop a renewable grid from the start?

Glyn Jenkins, Vancouver, BC, Canada

EC: Certainly that is an argument it is possible to make. My concern would be that given the huge pressure to deliver electricity to poorer people and rural areas, the temptation will inevitably be to come up with the lowest-cost solution, which is unlikely to be at the cutting edge of technology. Building a ”smart grid” instead of a dumb one, for example, is a more attractive option when you are starting from scratch, rather than replacing an existing infrastructure. But it is still likely to be more expensive.

WR: I don’t think the Indians view it as a blessing at all and would be quite happy to have a reliable kilo-watt hour at their fuse box even at some incremental environmental cost. The strategy for India and other developing countries is how to mobilise the capital necessary to bring new power generation capacity on stream to meet their growth requirements, without aggravating the planet’s chances of survival. It is not an option to deny Indians or others the right to growth.

But how do you create the market conditions necessary to draw in the foreign capital? Some 60 per cent of the total required investment for energy infrastructure is for electricity and a very large piece of that is in the developing world. In nearly all developing countries, electricity rates are too low to attract capital, regulatory regimes are too frail, transmission capacity and grids do not allow wheeling of power around countries - and governments do not have the budgets necessary to carry this capital burden.

The solutions reside largely in foreign direct investment. And if that is not bad enough, slower economic growth, higher food prices, general inflation are all making it more difficult for governments in these countries to ask populations to shoulder higher electricity prices. Not to put too much of a burden on one mechanism, but putting a price on the ton of carbon through a cap and trade system broadly adopted could become an important source of capital for this transformation of developing country electricity markets. This would only provide part of the answer. Incremental sources of private finance will have to come from somewhere, but in today’s financial markets, risk is going to be more closely assessed. That will not make energy project lending any easier.

All solutions will be necessary to help developing countries choose better technologies - concessional financing, development assistance, market differentiation, carbon trading, supplier credits will all need to play. But every power plant decision made anywhere for carbon dioxide intensive coal-fired capacity means a time horizon of 60 years for that technology choice.

As to a renewable grid, I refer the questioner to an earlier response about keeping the potential for renewable energy in perspective. It can definitely be part of the solution, but the problem is vastly bigger than available or affordable renewable responses.

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Is it not the case that the energy companies - and other utilities, water companies for example - have been making huge profits for years while watching the infastructure crumble? Surely the short term concerns of shareholders will always be at odds with the huge amounts of capital needs to build a 21st century infastructure?

Callum Johnston, Edinburgh, Scotland

EC: The energy companies have indeed been making big profits but they have been investing vast sums as well: $20bn-plus a year in the case of BP, Shell and Exxon.

It is also true that much of the developed world’s energy infrastructure has been crumbling, but it is hard to see that the energy companies have been doing particularly well as a consequence. Ask any BP shareholder. The truth, of course, is that if we want this investment, someone has to pay for it, and ultimately that ”someone” is us, through higher energy costs.

The short-termism of shareholders is a fair point but it is one of those problems that is always with us. What is the alternative, I wonder. No one really thought the Soviet Union did a great job of investing in infrastructure. It comes back to a point I made earlier, I think: there is an important role for governments in setting incentives for long-term investment decisions that businesses will respond to.

WR: There is definitely a tension here. We have for the past two decades put great confidence in two criteria to guide the reform of our utilities. In the case of energy, to get governments out of the business of electricity and gas - to privatise them. The two criteria were to let competitive forces operate and to seek economic efficiency. You may have heard former Federal Reserve chairman Alan Greenspan in recent congressional testimony allow as how he had put more faith in institutions’ instincts to pursue these principles that has proven to be the case. In the gas or power business, money is made in transmission, generation or distribution - all regulated by governments at multiple levels. If the regulators get the regulatory framework right, the businesses will adapt to doing what needs to be done.

Unfortunately, the early years of deregulation were protected/masked by the large excess capacities put in by government utilities to ensure security of supply. State utilities were more governed by the social contract with the customers than they were to profitability to divide among shareholders expecting dividends. Now, the surplus capacity has been absorbed.

Countries lack transmission lines, gas storage, generating capacity etc because it is not in any private sector operator’s interest to build capacity it won’t use. Nor is it utilities’ interest to invest in more environmentally sensitive equipment than necessary if they can’t get repaid.

The issue, then, is for governments to decide what policies they want implemented concerning security of supply, environmental standards, equity and distributional effects. Governments pass these policies to regulators who embody them in regulations such that the necessary incentives are in place. We will come a lot closer to achieving theses policy goals once companies know what is expected of them. One obvious example of rational company behaviour running counter to public policy is the predisposition to turn always to gas for power generation when more environmentally secure options are available, because the regulatory framework does not put sufficient emphasis on low carbon options.

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The global financial crisis and the looming recession will hit spending in all sectors of the economy - corporate and government. What effect will it have on the energy infastructure sector?

Bobby Seiler, New York, USA

EC: A very significant one, is my guess, and I think we have not seen anything like the full extent of it yet. There is a ”double whammy” here, with falling oil and gas prices compounded by the drying up of debt and equity finance. There are a few stray anecdotes already of projects being delayed or cancelled - the Canadian oil sands, a notoriously high-cost area, seems to be one of the worst hit - and I suspect we will see plenty more, as well as corporate failures and many smaller companies looking to bigger players to rescue them.

WR: The full effects of the financial crisis are hard to anticipate, but there is little doubt they will have an impact on the energy sector. Energy investments rely heavily on borrowing and the combination of reduced credit availability and lower prices for energy will chill current planning for major infrastructure. This will accentuate supply demand tensions in conventional energy markets, possibly aggravating price volatility and security of supply. How that evolves will depend on how soon confidence is restored in major lending institutions. Depending on how long the economic slowdown and credit crunch last, efforts to address carbon abatement and probably costly alternatives to conventional energy may push these concerns towards a back burner. That would be unfortunate and will have to be resisted.

The earliest improvements in energy systems will come from greater efficiency and as I said earlier, they will deliver some 40 per cent of early carbon abatement results. But improving energy efficiency also requires investment and while ultimately the payback can be short, decisions to invest in new capital will be deferred in times of uncertainty. Up to now my focus has been on industrialised countries. The impact of a credit squeeze will be even greater in developing countries where risks are higher and payback generally longer.

Perhaps some flexibility will be apparent in energy commodity markets at the outset of lower economic growth as demand slips off, but this signal to the upstream to go slower, will only create tensions later in supply as economic activity recovers.

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It seems that the US in particular has a problem with infrastructure. Have the US authorities fully understood the scale of the challenge?

Kirin Mattu, unknown

EC: The US does have big problems, particularly in power because of the age of much of its infrastructure. But it would be completely wrong to say its position is uniquely bad. Europe also needs massive investment, and in India, 400m people still have no access to electricity. The US also has scored some important successes. The reversal of the decline in its natural gas production is an important achievement, which is bringing real benefits to consumers in terms of lower prices.

WR: I don’t think the US has a particularly difficult problem with infrastructure. Much capacity in power generation will need to be renewed over the next years, in particular older coal plants and the first wave of nuclear retirements, but the task is not beyond the capability of the sector if the sector knows what the rules of the game are and that the rules will not be changing. The greatest impediments to infrastructure investment are regulatory uncertainty and policy ambiguity - in particular in relation to promoting lower carbon options. These uncertainties combined with a popular aversion to energy infrastructure (”NIMBY”) it is indeed the case that infrastructure investment is running behind requirements.

Many years ago US vice-president Dick Cheney warned that the US had used up all the surplus capacity inherited from the days of public utilities and overbuilt oil and gas infrastructure. He was right then, and he would still be right now. The next administration will need to identify a concrete set of energy policy priorities designed to respond to the twin challenges of security of supply and sustainability, not by seeking to achieve ”energy independence” which is impossible, but sending clear instructions to the private sector via the regulators.

The US challenge does not exist in isolation. Collaboration with other countries around the world will be essential to meeting global energy requirements in a safe and sustainable way. The first major challenge for the next administration will be to define how it plans to address climate change and greehouse gas abatement. The world is expecting a significant shift in US policy, but no one should underestimate how difficult it will be to achieve a consensus amongst those who have been proclaiming their commitment to robust policies in the expectation that they would not have to inplement them.

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Your special report today suggested that nuclear power was a solution to the energy problem. But in a post 9/11 world, surely nuclear power poses more risks - in terms of security - than it solves?

Neil Menzies, Vietnam, Thailand

EC: You are absolutely right: along with waste disposal, proliferation and security are the most serious drawbacks of nuclear power. The point about nuclear power, in my opinion, is that it is one of the ”least worst” options. If the alternatives are gas, which creates carbon dioxide emissions and belongs mainly to Russia and Iran, or coal, which has even higher emissions, then nuclear does not look so unappealing. Wind power is intrinsically unreliable, and no other renewables can yet be delivered at scale. As Winston Churchill said - approximately - about democracy: ”It is the worst possible option, except for all the others”.

WR: Nuclear power is part of the solution to energy security and sustainability. It has been demonstrated through thousands of years of reactor operation to be a safe source of electricity. In light of recent increases in the cost of gas linked to oil prices, the economics of nuclear power have improved substantially. Nuclear is still expensive up front in its capital costs, but the fuel costs during the life of the reactor are very small compared with fossil fuels. The decline of oil from $147.27 in July to today’s prices does not change this assessment. Added to the improving economics of nuclear is the fact that it is virtually carbon-free in its operations. This could become an even more important feature as carbon takes on a meaningful/tradable market price.

Nuclear power is not appropriate everywhere depending on the nature of electricity demand, the preparedness of the institutions to safely oversee nuclear power, the maturity of the electricity market and the geological circumstances of the location for a nuclear power plant. Governments deciding to build nuclear power plants need to understand the responsibilities that come with the decision. They need to ensure independent regulatory and safety oversite of nuclear installations including their adequate protection from terrorist activities. The fact of 9/11 cannot serve as a rationale for abandoning nuclear power, but it is certainly a fair warning that a terrorist threat exists and must be anticipated in design and operation.

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Shouldn’t investment in green energy infrastructure actually increase as governments move to raise spending in today’s environment?

Nick G, London

EC: Indeed it should. There is potentially a huge investment demand for clean energy infrastructure. The uncertainties, however, are very important. Exactly what kind of spending will be needed and how will it be delivered? We don’t know. In fact, we have only the vaguest idea of the answer.

WR: Well, it is not yet clear that governments will necessarily move to increase spending. Their first impulse will be to increase availability of credit to put the private sector back to work creating jobs and investing in productive capacity. The risk of the current crisis is that a shortage of capital and tougher lending conditions will put pressure on investors to cut costs they don’t need to incur. Many efforts to address environmental concerns are still on a voluntary basis or to bolster corporate image and may be sacrificed in a tighter environment.

Another factor could operate against some green investments. Many governments are strongly supporting renewables technologies to help them through their initial phases of market penetration. But until grids are smarter and transmission more agile, much of the renewable capacity has be backed up by conventional power. A government or utility strapped for cash is likely to go with the cheapest option for adding capacity and defer the renewables projects to later.

It may be that an economic slowdown will take some pressure off the need for large increments of energy infrastructure - in the short term. That would provide a bit of policy breathing space for identifying the best options for new capacity that address both the security of energy and its sustainability. Frankly, I think there is a risk just now that a number of public policy priorities will be subordinated to getting people back to work. It will be important during this period not to lose sight of longer term public policy objectives in an effort to meet the exigencies of shorter term political pressure.

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We have witnessed, in the past month, the results of mispricing and misunderstanding risk in the financial markets. Are energy regulators and energy companies any better equipped to assess risk and make the forecasts needed for ongoing capital investment?

Roy Wares, Vancouver, Canada

EC: A very good point. Anyone who committed to big plans on the basis of $140 oil or even $100 oil is in trouble now. Even more so if they believed the forecasts of $200 and $250. But on the other hand, energy companies are at least investing in real assets. If you build a power station or a pipeline, you are inevitably taking a bet on future market conditions, because the assets will be around for decades, and sometimes those bets go wrong. But if you can wait long enough, assets that seem worthless can turn out to be very valuable. The UK’s nuclear industry had to be rescued by the government in 2003; this year it sold for £12bn. People will always need heat and light. They will not always need collateralised debt obligations on sub-prime mortgages.

WR: The short answer may appear to be ”no”. The long answer is more likely, ”I think so”. But the events in credit markets have only added to the awareness already building in energy and power markets that there needs to be a recalibration of regulatory instructions to markets and substantially greater transparency. Let me focus on the latter because much of the mischief we have discovered in credit markets would not have happened if transactions had been more visible to regulators and to other market participants to ensure more of the general populations’ interests. Again, I refer to Alan Greenspan’ s comments in Congressional hearings about the failure of self-regulation by the trade.

In oil markets, we have only in the past few years been able to generate a universal system for reporting a limited set of oil statistics - the so-called Joint Oil Data Initiative. It is only a first step gathering over 90 per cent of both world oil supply and demand data, but it is a first step more than has been take in gas markets. In trading, oil and gas transactions are measured/recorded by a number of authorities, but only certain categories of trade must be recorded. More needs to be done here to improve reporting and transparency and market awareness of what is going on.

One further area I think could benefit from some institutional change would be the evaluation of how oil and gas companies assess upstream risk. They should be allowed to assess that risk in terms of the politics of the resource holding government at federal and sub-federal levels, regional stability and geologic factors. And yet, their risk assessment in their core business is reassessed by share evaluation analysts whose criteria for success are short term/quarterly profits statements or annual dividends to share holders. A primary commodity company can only be successful if it plans over a 25 year horizon.

Hopefully the lessons we should derive from out-of-control commodity markets and the sub-prime exposure of cowboy banking will not be ignored as time goes by and other crises arise.

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Goldman Takes Stake in Blue Source

The Goldman Sachs Group, Inc. (NYSE: GS) has purchased a minority stake in Blue Source LLC, a U.S. developer of carbon credits from greenhouse gas reduction project, according to a release issued yesterday by the two companies.

The size of the equity stake and the purchase price were not disclosed. However, Reuters reported that a source close to the deal said the stake is less than 10%

Through the collaboration, Goldman Sachs will structure and market a broad range of verified emissions reductions (VERs) resulting from greenhouse gas (GHG) reduction projects in Blue Source's portfolio, including those associated with methane management from coal mining, wastewater treatment, landfills and animal waste; energy efficiency; carbon capture and sequestration from fertilizer and natural gas production; and industrial gas destruction.

Goldman Sachs aims to bring the reductions to a market increasingly eager to engage in a low carbon economy. In addition, Goldman Sachs gains tools to help its clients manage GHG-related risks in both the voluntary and pre-compliance carbon markets.

Furthermore, the recently announced joint venture between Blue Source and certain affiliated investment funds of Och-Ziff Capital Management Group LLC (NYSE:OZM) provides a competitive source of funding to identify, develop and manage emission-related investments, thereby supporting the growth of Blue Source's offset portfolio.

"Combining the market reach and trading capabilities of Goldman Sachs with the project development skills and supply position of Blue Source is not only a winning combination, but an important step in the development of the North American carbon market," said Bill Townsend, CEO of Blue Source. "This unique agreement is the next step for Blue Source as the US carbon market evolves from voluntary to compliance. We have been able to develop a high-quality portfolio of independently verified emission reductions from projects based in North America, and this new alliance creates an exceptional opportunity to reach a broad range of offset buyers through a highly experienced and well-trusted institution."

"Goldman Sachs is committed to leveraging the first-mover position of Blue Source and its extensive experience and relationships to provide best-in-class risk management to North American voluntary and compliance buyers," said Leslie Biddle, Global Head of Commodity Sales at Goldman Sachs. "Interest in the pre-compliance carbon market in the US is growing rapidly and we are excited to be able to offer our clients immediate access to a diverse selection of emission reductions to manage their carbon risk."

are carbon credit real?

Carbon Credits: Bum Life Special

CDM progress

Giving the Environment Credit

Risk managers face a number of challenges when their companies enter the fledgling carbon credit market

By: Dan Riordan President, Surety, Credit And Political Risk, Zurich North America Commercial

The passage of the Kyoto Protocol, which became effective in February 2005, signalled a growing consensus on the need to control and reduce greenhouse gas (GHG) emissions. One of the more interesting consequences of Kyoto has been the creation of an entirely new branch of international commerce -- the carbon credit trading market.

This is a serious, global market valued at US$60 billion in 2007. It is projected to be valued at US$200 billion by 2020. And while the financial and environmental gains associated with the carbon credit market can be significant, a number of risk management issues warrant consideration. That being said, currently available insurance products and new approaches in the development can help organizations address many of these risks.

CARBON CREDITS

Carbon credits are key components of various GHG emission-trading schemes nations have employed following the enactment of the Kyoto Protocol. Under Kyoto, based upon a number of factors, emission targets are allocated by country under the auspices of the United Nations. Some of these targets are challenging, reflecting a growing sense of urgency about global GHG emissions. Ideally, a nation will attempt to reduce directly its GHGs through the application of new technologies in power generation, industrial production, transportation and other key segments. However, countries may also mitigate challenging domestic carbon-reduction targets by investing in "clean development mechanisms" (CDMs) in developing nations. This means participating in carbon credit projects that would not have occurred in the absence of Kyoto. The UN must certify such projects as CDMs for the projects to qualify for Certified Emission Reduction (CER) credits. Examples of these projects include renewable energy power plants, waste-to-energy plants, re-forestation initiatives and other activities.

Carbon credits earned through investments in CDMs can be applied against a nation's or a company's own GHG reduction targets, ultimately contributing to aggregate reductions of emissions on a global scale. Investors participating in the carbon credit market will benefit from credits monetized by national governments and paid out as investment gains.

In today's global economy, any company with operations or business interests in countries that are signatories to the Kyoto Protocol must take into account regulations limiting GHG emissions. In some cases, companies will find emissions directly regulated, with legal and financial ramifications if targets are not met. Even companies that are not directly regulated under the Kyoto agreements must take to heart the marketing and public relations implications of non-compliance, given the widespread public support for Kyoto.

The benefits of the carbon credit market are many, but there are also a number of genuine risk management concerns. Chief among them is the political risk associated with projects in developing and potentially unstable parts of the world.

Investors could face expropriation, nationalization or confiscation of a project, its assets and the stream of carbon credits it would generate. Political violence or civil unrest could also damage a project or prevent it from operating effectively.

A related risk is the potential of contract frustration by a government ministry or agency with the responsibility to approve the issuance of carbon credits. The possibility exists that a controlling agency might deny the issuance of credits for purely political reasons, rather than bona fide commercial reasons, preventing investors from realizing anticipated returns. There may also be a need for more comprehensive credit insurance associated with the export of goods and services, which can include the sale of carbon credits.

Investors must also contend with the spectre of regulatory or legal risk. Since the carbon credit market would not exist in the absence of the Kyoto Protocol, any significant change in the international regulatory or legal framework related to Kyoto -- such as, for example, expiration and non-renewal of Kyoto -- would have an immediate and profound impact on the economic viability of carbon credit projects.

Finally, the global response to Kyoto is driving the development of many technological innovations. As is generally the case when new technologies are involved, there are risks that innovations may not perform as designed, with resultant financial loss to investors.

Insurance carriers with sufficient global capabilities and product portfolios will be important participants in the continued viability and growth of the carbon credit market. Political risk coverages of the types needed to insure CDMs have long been staples of multi-national risk management programs. Insurance products for emerging and alternative energy technologies are already available from forward-looking insurance carriers, with future products in the pipeline.

Whatever the rewards and risks of the carbon credit market, the most encouraging aspect is a recognition that the private sector can be a progressive force in achieving important environmental goals. The Canadian experience is an example.

Canada has always been a society with highly developed environmental sensibilities, due largely to the country's transcendent natural beauty. As a signatory to the Kyoto Protocol, those sensibilities are now codified in environmental regulation. However, many Canadian companies have long demonstrated genuine environmental awareness, even extending to the adoption of voluntary commitments to reduce their carbon footprints. For many Canadian companies, participation in the carbon credit marketplace is providing an important bridge to a greener future, while ensuring economic viability and competitiveness in the present.

Global insurers with the presence, knowledge and resources to support this effort will be challenged to deliver innovative products to help manage the risks of a shifting environmental paradigm. If history is any guide, we have no doubt the industry will be up to the challenge and will be a major contributor to the greener future that all of us hope to achieve.

EcoloCap Signs Exclusive Agreement with CantorCO2e, Leading Carbon Credits Broker

MONTREAL, QUEBEC, Oct 23, 2008 (MARKET WIRE via COMTEX) -- EcoloCap Solutions, Inc. (ECOS:

0.34, -0.02, -5.6%) ("EcoloCap") today announced that it has signed an exclusive Greenhouse Gas Offset Management Services and Representation agreement with CantorCO2e LLC and its affiliates ("CantorCO2e") to develop and market EcoloCap's growing portfolio of potential Certified Emission Reductions (CERs) as well as pre-Clean Development Mechanism (CDM) Verified Emission Reductions (VERs). This agreement significantly enhances EcoloCap's ability to access a wider range of CER and VER buyers and will permit EcoloCap to increase its rate of generation of additional CERs.

Dr. Tri Vu Truong, President and CEO of EcoloCap said "we see this as a major step forward by EcoloCap. We evaluated several alternatives in order to find the best way to market our CERs and VERs, and to achieve the best prices for our expanding CER and VER portfolio. We feel that CantorCO2e will give us the best results and we look forward to working closely with them to build increased value for our shareholders."

EcoloCap is currently focusing its marketing efforts on China and Vietnam and a range of Clean Development Mechanism (CDM) projects have already been secured which represent an annual volume of over 1,000,000 CERs with most CER contracts being multiple-year. Current prices for CERs on the World Market can range up to 19 Euros (approx. US$25.50).

Corinne Boone, Managing Director, CantorCO2e said "we are looking forward to working with EcoloCap to develop its portfolio of potential CERs and VERs and market them to our global client base. The diversity of the project portfolio and the potential for growth could represent a significant addition to CER and VER markets."

Dr. Truong added "our agreement with CantorCO2e enables EcoloCap to immediately increase our marketing efforts to secure more CDM projects. As well, CantorCO2e's experience and expertise will enable us to more efficiently achieve accreditation of these projects so that the CERs and VERs can be sold more quickly."

EcoloCap's objective is to double its total CER reserves over the next six to nine months, with an initial target of accumulating a portfolio of 5 million CERs annually.

About CantorCO2e

CantorCO2e is a leading provider of transaction and consulting services to the environmental and new-energy markets. Operating globally, CantorCO2e assists its clients to efficiently manage carbon emissions and to meet evolving compliance and industry standards. CantorCO2e serves environmental credit buyers and sellers in all of the world's principal emissions markets, including the Kyoto markets (CDM, JI and European emissions trading), the US compliance markets, and the voluntary carbon market. CantorCO2e helps entities transact via electronic trading screens, recorded telephone lines, auctions and negotiated contracts. The CantorCO2e team advises equity investment funds on carbon finance, introduces investors to projects, and structures forward sales to enable project developers to fund their investments. CantorCO2e is headquartered in London and San Francisco and has over 100 emissions trading professionals located in fourteen offices across five continents. This global yet local presence, together with the unique experience of its staff, enables CantorCO2e to provide an unparalleled level of service to clients. CantorCO2e is a member of the Cantor Fitzgerald group of companies. For more information about 

About EcoloCap Solutions, Inc.

EcoloCap is a US-listed, international company focused on the commercial development of green energy projects in emerging economies, especially in Asia. Rising energy costs, climate change concerns, and the need to reduce greenhouse gases create an unparalleled opportunity for the development of renewable, sustainable energy sources which will be a significant, long-term opportunity for the 21st century.

To maximize shareholder value EcoloCap is focused on projects which qualify for Carbon Emission Reduction credits (CERs) registered under the Clean Development Mechanism (CDM) of the United Nations' Kyoto Protocol. EcoloCap utilizes its know-how, capital, technology, engineering expertise, and on the ground operations management to work with governments and enterprises in emerging economies in order to successfully reduce greenhouse gases for both capture and utilization. By this process EcoloCap acquires UN Certified Carbon Credits (CERs) at favorable costs, which are then sold on the world market at prevailing prices

UK wind farm plans on brink of failure

A maintenance boat works next to the turbines of the new Burbo Bank off shore wind farm in the mouth of the River Mersey. Photograph: Christopher Furlong/Getty Images

A major threat to Britain's ambitions for renewable energy will emerge this week when wind industry leaders admit that targets set for 2020 are looking increasingly unrealistic.

They will use a high-profile conference in London to warn Gordon Brown that there is little chance of achieving the government's goal - of wind generating one third of all UK electricity within 12 years - without a huge injection of public money.

It comes as an Observer investigation reveals that planning delays, long delivery times, escalating costs, 10-year hold-ups in connection to the national grid and technical problems in building offshore windfarms all threaten to derail Brown's ambitions. The result could be electricity shortages by 2020, failure to meet climate change and energy targets and possible hefty fines from Europe.

The developments will come as a blow to the government. Last week Ed Miliband, the new minister for climate change, said Britain would increase its target for reducing greenhouse gas emissions by 2050 from 60 to 80 per cent.

Brown will tell delegates at the annual conference of the British Wind Energy Association (BWEA) this week that the UK industry is now a world leader. But others will claim that there is a severe shortage of engineers and companies are reviewing their commitments to wind energy because of spiralling costs. Britain is legally committed to generating 15 per cent of all energy from renewables by 2020. This means that wind power, which presently contributes about 4 per cent of UK electricity, must expand to generate 36 per cent within 12 years.

No country has tried to switch its electricity supply so quickly on this scale, and to achieve it the industry will need to build nearly 15,000 turbines, generating 35 gigawatts (GW) of electricity, on land and at sea. Many experts say it is technically feasible to meet the targets, but there is a growing conviction that the plans were rushed through so quickly by the government that it will now take substantial new money and guarantees to work.

It is a very different story elsewhere. This week, in a vast warehouse in Berlin, blades for the world's largest wind turbine are being handcrafted by teams of people and robots. Each is 20 metres longer than the wing of the world's largest aeroplane, and when perched on top of 140-metre concrete towers in Belgium next year their tips will soar nearly 250 metres above the ground - higher than any building in Britain.

Ten years ago most wind turbines in Europe could barely power 200 homes, but technological advances have been so great that this single seven megawatt (MW) machine, known as the Enercon E-126, should provide nearly 20 million kilowatt hours of electricity a year - enough to power a town the size of Penzance.

There are others even bigger being planned in the US, but independent analysts say there is little chance that one of these turbines will be installed in Britain for many years. Many are deeply sceptical, saying that the government should not have put so much faith in wind power without making it easier for the industry to operate.

'The numbers do not add up,' said energy analyst Professor Ian Fells of Newcastle University. 'It is physically impossible for the industry to meet its target. The most that any country has ever built offshore is 350MW in a year. But they need to install nearly 10 times that in 12 years, and most will be far offshore. It means they will have to install hundreds a week. They cannot do it.'

Even Maria McCaffery, chief executive at the BWEA, has admitted for the first time that the industry might not reach the ambitious targets. 'It's tough, but just about achievable,' she said. 'But how close we can get to the target depends on what happens in the next few years. It's not guaranteed, but it's too soon to be defeatist.'

Paul Cowling, head of Npower Renewables, one of the two largest wind companies in Britain, with 4.5GW of wind power planned but not yet approved, said: 'With the right commitments from government, it's just about do-able. But we have never had targets like this before. Everything must be joined up and a lot can go wrong.'

A senior executive in a power company, who asked not to be named, added: 'There is absolutely no room for manoeuvre. The old nuclear power stations will be out of service, the new ones will not be on stream and big renewable projects like the proposed Severn barrage have not even been agreed, let alone built. Wind is the main plank of the government's energy policy over the next 12 years, but if anything at all goes wrong anywhere, then the targets will be missed and we are all in trouble.'

New studies warn of looming financial and supply problems. Last week the Carbon Trust, a government agency, warned that the steep rise in the price of building offshore farms could undermine the whole project. 'Currently the risk/return balance for offshore wind is not sufficiently attractive, and regulatory barriers would delay delivery well beyond 2020,' it said.

Tom Delay, the Trust's chief executive, added: 'Industry costs have become very, very expensive, and both government and companies need to work hard to tackle this. Without urgent action, there is a risk that little additional offshore wind power will be built by 2020.'

Cambridge Energy Research Associates says that Britain should expect a 20 per cent increase in offshore wind capital costs over the next few years on top of the 50 per cent increase in the past three years.

In August, energy consultancy Sinclair Knight Merz reported that most existing wind turbine manufacturers were booked solid for the next five years. 'The cost of offshore projects has doubled in five years,' it said.

That is not to mention the powerful opposition on the ground. Yesterday countryside protection groups warned that resistance to wind farms would be fierce and that planning delays, public inquiries and protests were inevitable. There are likely to be outcries in Cornwall, Wales, Yorkshire and Scotland when the scale of some of the farms is seen and it is understood that they will need hundreds of miles of 60-metre pylons to criss-cross some of Britain's most beautiful landscape.

Dr Frank Mastiaux, chief executive of the climate and renewables division of German electricity supplier E.ON, which is now building a 180MW offshore farm at Robin Rigg in the Solway Firth, said the UK targets were 'extremely challenging'. He added: 'Future wind farms will need to have thousands of turbines, each so big it would be like a football field turning on top of a steel mountain.'

One major problem is planning laws, which have been holding up dozens of projects for years.

Stephen Tinsdale, head of communications at Npower renewables, said: 'It can cost up to £200,000 just to put an application in, and you can expect it to take three to four years to go through planning. Two-thirds of all applications are refused. On top of that, there are conditions from the Ministry of Defence over radar and conditions by local authorities on when we can and cannot erect them. England has very few places left where you can build large farms. There are potential delays at almost every stage.'

New laws should make planning speedier for the industry, but the Infrastructure Planning Commission, which will handle applications for all large farms and should be set up next year, has not been tested yet either in practice or in the courts.

Another problem facing companies is getting connection to the National Grid. Some companies in Scotland have been told to join a 13-year queue and are being asked for deposits of millions of pounds before the grid will agree to connect them. Currently, 115 Scottish renewable schemes, totalling 9GW of mostly wind power, are waiting to plug into the grid before they can supply electricity. Some already have planning permission but have to wait many years to connect.

'It is plausible to meet the target, but it is very deeply challenging,' said a spokeswoman for National Grid. 'We have signed agreements to connect 16GW of renewable generation throughout Great Britain, but over 75 per cent of this total is stuck in the planning system.

'Urgent reform to the UK's planning laws and energy regulation are needed. We're fully aware that some dates are later than some people would like. We will try to work with developers to bring the dates forward wherever possible.'

But in an unpublished paper submitted to the government, National Grid says that, while it is possible to connect new offshore farms in time, the onshore target of 14GW of wind is 'not credible'. 'This is an area where we are not optimistic. We believe that only 12.9GW is credible,' says the paper.

The real prize for governments looking for major increases in wind capacity is a series of giant 5-6GW farms with hundreds of the biggest turbines 10 to 20 miles offshore. The first are being planned to be built after 2014 in the Bristol Channel, the Wash and off Wales and Yorkshire. But wind companies are having increasing doubts about their financial viability. While they are technically feasible, they are already more than twice the cost of onshore farms and the price is spiralling upwards.

Signals that UK offshore farms may not be profitable came in June when Shell pulled out of the consortium planning to build Britain's biggest offshore farm, the London Array in the Thames Estuary, in favour of developing more profitable wind projects elsewhere. Then last week the government of Abu Dhabi stepped in to help the project after Royal Dutch Shell withdrew.

Other developers are questioning whether they can justify the investment needed in Britain. Shell and BP are competing in the US to build the world's largest wind farms. 'Many are now recosting their plans and are attracted by other countries who are tempting them with tax breaks and a freedom to build what they want practically anywhere,' said one analyst.

Npower's Cowling said: 'We are going to need different boats, a whole fleet of vessels, offshore cable installers, helicopters. We are already getting close to our hurdle rates. If things get worse, it makes it a marginal decision whether we invest in them or not. It's all very risky. Because the UK is a difficult place to do business, the utility companies will just go elsewhere. We are not threatening to go, but if a utility finds a project which it can build quickly, it will go there. We are committed to the UK, but it is difficult.

'Until you get absolute consent from government, people will dither and it will take longer to install farms. Industry costs have become very, very expensive, and both government and companies need to work hard to tackle this.'

Potentially more serious is growing competition from other countries both for turbines and other machinery, as well as engineers. The market for wind is very strong, with more than £40bn invested worldwide last year, demand for turbines going through the roof as countries rush to meet climate change targets, and the very few manufacturers producing turbines now looking only for large orders. Emerging Energy Research, a leading research and advisory firm analysing clean energy markets, expects the international wind power industry to increase 500 per cent over 12 years.

Vestas, the world's biggest turbine maker, now has a £6bn order book and its turbine prices have risen 74 per cent in the past three years. China plans 100GW of wind power by 2020, a ten-fold increase from today. Texas alone plans more wind power than is expected to be installed in Britain in the next 20 years. The net result is that prices are escalating and orders for equipment taking longer and longer.

'Everyone wants wind power. If you ordered today you could possibly get a turbine in 2011. But you would have to be a serious order,' said an Enercon spokesman. 'It is a very good time for wind.'

Targets

2008 Wind to generate 3GW of electricity – enough to 
power several million homes

2010 Renewables to generate 10 per cent of all UK 
electricity, of which wind is expected to constitute 60 per 
cent. Wind to generate 36 per cent of UK electricity by 2020

2020 20 per cent of all EU energy to be produced from 
renewables

2050 UK to reduce carbon emissions by 80 per cent

Carbon Trading, can it save the world?

Do the peaks and troughs of the financial markets really hold the key to solving our environmental troubles? Faisal Islam investigates 

Forget the eco warriors, ignore the oil majors and park Al Gore’s hybrid well away. It’s actually the masters of the financial universe that are, we’re told, going to save the world from the perils of climate change, while carrying on doing what they do best: making millions, and in some cases billions.

Welcome to the Carbon Market, aka ‘emissions trading’, where greed can never have been so green. Because ‘almost everything has a carbon footprint’, the protagonists think that carbon could one day become the most traded commodity in the globe. Half the current trading comes through London and the City of London is emerging as the world hub for carbon capitalism.

Kingston-upon-Thames is an unlikely hub for anything, but nestled in the greenery beside the river Thames lies a futuristic office block designed to accommodate a small army of planet-saving, carbon dioxide-sapping capitalists. Arthur Tait is in charge here, and his ambition is clear: to become the number one trader of carbon in the world.

Can ambition such as this – can the profit motive itself - really be the planetary saviour?

‘Effectively, yes,’ says Tait. ‘I think it’ll save it a lot more efficiently than a carbon tax would, or forcing draconian measures on countries that wouldn’t take those measures. So a market-driven force is probably the only way we’re going to save the planet.’

That, in part, is the point of this nascent market. Put a price on emitting carbon and then someone, somewhere, will take the money not to emit it. At the same time there are a whole load of brokers, traders, bankers, fund managers and lawyers trying to match supply with demand – making a packet, while retaining a planet-saving afterglow.

But guess who Mr Tait works for? A company whose other ambition is to be the world’s biggest supplier of hydrocarbon energy: Gazprom, the state-run Russian gas giant.

In the background his team of traders are barking into their trading phones, hustling deals, watching variables as diverse as temperature charts in Europe, the escalating price of crude oil and the negotiating position of the awkward Czechs over the allocation of the right to emit carbon in Europe. There are no pinstripes or strangely coloured blazers. The traders are casual but utterly focused on the latest information coming through their Reuters terminals.

‘From a standing start a few months ago, the people here will aim next year either to sell into the market or trade eight million tonnes of carbon reductions, but within the next three years grow that up to 80 to 85 million tonnes,’ says Tait.

His team has just signed a deal to buy up 1.3 million tonnes of CO² emissions savings made through upgrades to a polluting manufacturer in South Korea. The reductions have been certified to the United Nations standard. But that’s just the start of the wheeler-dealing. He takes me over to another floor of the building.

Carbon-neutral gas?

‘On Susan’s desk, what we’ll do instantaneously is sell on the bulk of those savings into the Japanese market,’ he says as Susan flogs, from a desk in Kingston, a million tonnes of finest-quality, unemitted Korean carbon to their near-neighbours in Japan. ‘Japan is very short of carbon.’

Of the 300,000 tonnes remaining, 70,000 is handed over to the trading desk to do smaller deals in the carbon market.

And 230,000 tonnes worth of carbon permits are sold to Gazprom’s commercial gas customers in the UK – in this instance, a major supermarket. It’s a remarkable ‘dual-fuel’ deal. Gazprom provides the supermarket the hydrocarbon-rich gas, and it also supplies the permits to offset the consequent emission of CO² from burning the fuel. It’s a popular new product: carbon-neutral gas.

‘Zero-carbon oil’ is probably being developed, somewhere in the world, right now (the brand name could be ‘crude, with a conscience’). For detractors, carbon-neutral gas is a startling symbol of carbon-trading’s false dawn.

Last year, the detractors numbered one rather unlikely man: Andris Piebalgs, the straight-from-the-hip Baltic bruiser who serves as the European Commissioner for Energy. He shares responsibility for Europe’s pioneering four-year-old emissions trading scheme. It’s known, in the jargon, as a ‘cap-and-trade’ scheme.

Countries, certain industries and companies have their emissions of carbon dioxide capped at a specific negotiated level. The right to emit that carbon is then handed out by the government in the form of a permit. Polluters emitting carbon require a credit for every tonne put out into the air.

Emit less than your allocated permit allows and surplus credits can be sold on the market: so polluters are paid to emit less carbon. Emit more than your allocation and you need to buy new credits, a financial punishment for overpolluters. The price is then set by the interaction of supply and demand for the credits. If all traders are emitting too much carbon, the price of permits will sky rocket.

The higher the price of carbon credits, the greater the incentive for these industries to rein in their emissions. That’s the theory, at any rate.

It is complicated, but it isn’t rocket science. The real difficulty, however, is in setting up the system in the first place, which brings us back to Mr Piebalgs.

His trailblazing European Trading Scheme (ETS) tripped over itself in Phase 1. The price of carbon crashed from an effective 30 per tonne to a pointless price of €0.63 (about 50p). But when, a year ago, I cheekily asked him if the ETS had been a failure, no-one expected him to say ‘yes’. He did.

‘Yes, I would describe it as a failure. If the price is less than €1 it is a failure,’ he told me. ‘And we also know the reasons.’

Commissioner Piebalgs went on to say that the price of carbon needed to be at least €20 to €30 per tonne. ‘If you want to create a market you shouldn’t make too many compromises – and the mistakes were obvious. If you give allowances for free, on a not very clear basis, you can expect that you have too many allowances and that’s what happened.’

Phase 1 of this scheme is now over, and earlier this year the European Commission launched its plan for Phase 3, rectifying these problems. We are currently in Phase 2, which is somewhere in between. The carbon price is back up above €20 per tonne and, say traders, teething problems are being ironed out.

‘The ETS is now entering its first real phase, so it had an initial phase where people might have criticised it for not working, but it did actually achieve its objectives in that it was really only trying to set up the market,’ says Arthur Tait. ‘The problem came because in the preliminary phase people didn’t necessarily know their emissions, so it ended up, in effect, that the targets were over-allocated, which people didn’t really realise until right near the end, so that’s why the price crashed.’

There are cursory lessons from those first few years, however, and not just within Europe but in New Zealand, Australia and, above all, the USA, where horse-trading about carbon emissions has become a regular feature of the presidential debates. The hope is that within five or 10 years, all of these schemes will interact, leading to a globalised carbon trade that could save several billion tonnes of carbon.

As Piebalgs said, the problem was that too many permits were allocated to Europe’s polluters. Industry had lobbied hard in the first experimental phase of the pioneering scheme.

Europe’s polluters would play ball, but they did not want to see their share prices slump. The end result was the collapsing carbon price, and no real cuts in carbon emissions.

In 2006, UK emissions from the power sector, which is the main sector covered by the emissions trading scheme, had gone up by six per cent on the year before. The price was so low that companies and power stations were able to pollute more and just buy very cheap allowances to cover the differences.

The answer would come from politicians being far stricter on the allocation of carbon permits. But there was another problem: not only were far too many permits handed out, all but seven per cent were handed out completely free, to the worst polluters.

‘Giving out permits free is like giving out money free,’ says Professor Paul Klemperer, a Government adviser on auctions from Oxford University. ‘Having any system of emissions permits will raise consumer prices, and those price-rises automatically compensate the companies for the costs of the permits. If you then give out the permits free, you’re compensating the companies twice. There is no need to give them extra windfall profits by giving away the permits.’

The result was predictable. Carbon trading forced up the price paid for electricity in Europe, benefiting power companies. Yet for the polluters, the cost of being part of the trading scheme was precisely nothing. Europe’s worst polluters were effectively handed billions of pounds of windfall profits from the scheme. In fact, the ETS was routinely mentioned by City analysts as a reason to buy shares in power companies and other heavy carbon polluters. In the end, a scheme designed to provide incentives to cut carbon emissions only succeeded in handing over billions to the worst offenders.

Precise numbers are hard to come by. A report for WWF by analysts Point Carbon puts the windfalls to power generators in Phase 2 of the ETS between now and 2012 at an incredible £50 billion. Ofgem, the UK energy regulator, sees windfall profits at £9 billion in Britain alone, but billions have already been made in the first phase of the trading scheme, which ended last year.

No surprise, then, that major US polluters and power companies are lobbying hard for the same helping hand, the same multibillion-dollar windfalls, from embryonic US emissions trading schemes.

Even the oil supermajors are feeling a little sidelined by this bonanza. Some of the biggest oil names are lobbying for ‘upstream cap-and-trade’ in the US, where carbon credits are earned and traded by the companies actually physically removing hydrocarbons from the ground, rather than those who actually burn the oil, gas and coal.

Paying the polluters

For economists such as Paul Klemperer, this jackpot was utterly predictable. ‘An emissions permits system that’s implemented this way makes even the most polluting firms better off,’ he says.

Carbon trading in and of itself should reward clean companies, punish dirty companies and channel the world’s investment to those parts of the world where £1 can save the emission of the largest volume of carbon dioxide.

‘A tonne of carbon saved above Beijing is the same as a tonne saved above Birmingham,’ is a carbon market mantra, but free permits have, in essence, been a rather expensive bribe to get power companies to participate in the scheme. It’s an entire field of juicy carrots, with little threat of a stick.

So great has been the carbon carrot crop, in the form of multibillion-pound windfalls, that they are now the subject of a unseemly four-way scrap.

The power companies say they need to keep on to them to invest in hugely expensive ‘green energy’ sources, such as wind, hydro and even nuclear. National governments, however, can see the Euro signs ringing, and have spotted a potential fiscal jackpot. Consumer groups, meanwhile, have been decrying the rising energy prices, as well as the superwindfall profits of energy companies, and want the money to be used to cut energy prices. And then there’s Europe lurking in the background. A superstate entity with a flag but no supranational tax base. Until now?

In January this year, the European Union launched its proposals to reform the carbon trading scheme in the post-2012 Phase 3 in order to rectify the Phase 1 fiasco.

As expected, allocations are tighter, the straitjacket is more uncomfortable for polluters, so the Emissions Trading Scheme should begin to bite.
Even more importantly, however, Europe’s nations were given the green light to auction rather than donate to their polluters the right to emit carbon. Instead of being allocated for free the amount of carbon you polluted last year (known as ‘grandfathering’), Europe’s polluters would have to enter a competitive auction for every tonne of carbon they wished to send into the atmosphere.

The economists predict that the net effect of that would be a swipe of the entire multibillion-pound windfall for European exchequers: arguably the biggest tax raid in history, and one sanctioned on green grounds.
So small wonder that the Chancellor of the UK Exchequer, Alistair Darling announced that Britain would push ahead with 100 per cent auctions of carbon permits for electricity producers as soon as Phase 3 starts. ‘It’s been wrong that electricity providers have got a windfall gain,’ Mr Darling says.

It was a move announced with little fanfare at his first Budget. The ‘green tax’ measures highlighted in the next day’s papers made much of extra vehicle excise duty, worth a few hundred million pounds. One hundred per cent auctioning of carbon permits is a potential headline-grabber worth 10 to 20 times as much. Mr Darling did not disagree that it would be worth billions of pounds, but would not give a number.

‘It’s not possible to say how much,’ he said. ‘It will raise money, but it’s surely money we can use to do other things to help with climate change – for example, transport.’
It seems a rather innocuous remark, but it is important for two reasons: first the hint of hypothecation, the earmarking of a green tax for green spending. Second, it indicates that the Treasury is expecting a fairly huge windfall – the creation of an entirely new green tax base. Forget fiddling with congestion charges, a few quid extra for your high-performance engine or the renewables obligation, this is the real deal.

A green-tinged windfall

Professor Paul Klemperer has an idea how much it is worth. He was the auction theorist behind the government’s £22 billion auction of third-generation mobile phone licenses, a decade ago. He believes the Government could raise even more – between £25 billion and £35 billion over the seven-year third phase of the European Emissions Trading Scheme. Across the whole European Union, governments could raise more than £200 billion.

‘The amount of money raised will depend on a number of things,’ says the Oxford University economist. ‘The number of permits you choose to sell and technological developments, but a ballpark figure raised in the UK would be £4 billion to £5 billion per year, and in Europe six or seven times as much, which comes to £30 billion per year.’

So if you thought carbon trading was too complicated or boring to merit the attention of an eco warrior, there’s £200 billion reasons why you might well be wrong.

Mr Darling himself suggested such funds could be spent on green transport projects. As a general rule, the British Treasury is rather sniffy about earmarking taxes for specific spending pledges, but the proceeds of carbon trading are so clearly green-tinged that even the Chancellor of the Exchequer seems ready to contemplate it. The hint of hypothecation creates the ultimate game of fantasy ecologist. A fleet of British TGVs could consign the carbon-spewing Manchester-London flight to history. German-style local transport infrastructures would drive cars off the road. Investing in CCS (carbon capture and storage) or wind farms, would be another option to green our energy-consumption.

When the Conservative Party talks of ‘taxing what you burn, not what you earn’, is it talking about using these proceeds to cut income tax? These auctions could raise enough to decrease the basic rate of Income Tax from 20p to 18p.

German leader Angela Merkel has suggested that the windfall could be used to boost aid budgets in order to help meet the millennium development goals.

Or perhaps the Treasury tendency will triumph and the money could simply go towards paying down Government debt, as was the case with the proceeds of the mobile phone auction.

Another government quango, Ofgem, has already come up with the idea of using ETS windfalls to help alleviate fuel poverty. The net result of that would be a mass recycling of money. Carbon trading raises energy prices. That increases fuel poverty, but incentivises better use of carbon-based fuels. This scheme would simply lower prices again, with a spot of redistribution.The more pertinent point from Ofgem’s analysis is its estimate of the £9 billion of windfalls being made by British utilities in Phase 2, between now and 2012. Even as the Chancellor of the Exchequer himself concedes that electricity companies’ windfalls are ‘wrong’ post-2012, nothing is being done about the same £9 billion bonanza before 2012.Energy companies are beginning to go public on their unhappiness about this windfall disappearing. Shell boss Jeroen Van der Veer recently suggested that such moves could see the oil giant stop all investment in Europe. A month after those comments the company pulled out of a key wind farm investment in Britain.

Other energy companies have broken ranks, such as Centrica, owner of British Gas.

‘Over the long term, clearly it is important that power generated from high-carbon sources such as coal should start to pay the cost of those carbon emissions, and what’s been happening in Europe up until now is that a number of those coal generators have got free carbon credits, which will continue until 2012,’ says Sam Laidlaw, chief executive of Centrica. ‘What we’re talking about is the regime after 2012, and we do believe that everybody should start to pay for the carbon they’re putting into the atmosphere through an auctioning system. So we are a supporter of full auctioning from 2012.’

Centrica, alongside other energy companies, seems very wary of some sort of windfall tax being used to extend the principle conceded after 2012 to the billions being made before then. Plans to invest in expensive new greener forms of energy require huge capital investments, says the industry, but economists, such as Paul Klemperer, point out that free permits are a highly inefficient way to encourage investment in clean technology.
Climate change or energy insecurity?

Decisions over how far to go on grabbing these windfalls are at the very heart of government’s Jekyll and Hyde relationship with energy companies. Yes, governments are worried about climate change arising from burning too much hydrocarbon, and wish to coax energy companies into line, yet in the same breath they are possibly even more terrified about energy insecurity, and feel pressured to help the same companies to extract as much hydrocarbon as possible to keep European homes warm. Clearly these two agendas are not always coherent.

That can be seen back in Kingston. Gazprom’s vision is to marry its unrivalled supply of hydrocarbon gas from Siberia to Russia’s highly inefficient industrial base, ripe for carbon-saving technology. Russia could be the Opec of the carbon market.
‘We’ll instigate projects in Russia. Those projects will reduce emissions. We’ll get certificates for those and trade those here too,’ says Arthur Tait. Gazprom would become a one-stop shop for ‘low-carbon’ gas.

Could the same reductions have been achieved with regulation? Possibly, but that would have required a different set of international negotiations. A carbon tax? Well, the economists say that 100 per cent auctioning combined with cap-and-trade more or less approximates to a carbon tax, but trading is far more politically feasible in many countries than the actual introduction a new tax.

So here’s the rub. Forget that carbon trading was a fiasco in its first years, this multibillion bribe for polluters to play ball has already been paid. There is now a huge pot of money, ostensibly being raised from people paying energy bills for ‘green’ reasons. How should this pot of tens of billions of pounds be spent? And who should spend it? Energy companies or governments? Or should it be given back to hard-pressed European consumers by cutting their energy bills, and thus totally undermine the rationale for carbon trading in the first place?

The carbon market is like no other, because it is utterly underpinned by political will. Politicians decide who gets the right to emit carbon in the first place. They then argue internationally over how this should be divided up between countries. The lesson of the past four years is that it has proved difficult enough at the European level, and yet the Stern Report and others say spreading this scheme across the whole globe is what’s really required to save the world from climate change. It’s down to the world’s politicians to show that this is not just hot air.

Faisal Islam (faisal.islam@itn.co.uk) is economics correspondent at Channel 4 News 

Wisconsin Badgers Features Big Ten's First 'Carbon-Neutral' Football Game

WASHINGTON, Oct 24, 2008 /PRNewswire-USNewswire via COMTEX/ -- University of Wisconsin-Madison alumni flying in from around the country to attend the October 25 homecoming game probably do not know that the Badgers' homecoming game against the University of Illinois this Saturday has been designated a "carbon-neutral" game.

UW Athletic department announced it will offset the carbon emission impact of this weekend's homecoming game by planting 20 acres of trees on property certified as a Tree Farm in Wisconsin.

The game, the first of its kind in the Big Ten and one of the first in the nation, will offer a chance to raise awareness of environmental issues, such as the damaging effects of carbon dioxide and the benefits of conservation and recycling. The event will also provide information on ways fans can take action in their daily lives to become more environmentally aware.

The 220-acre Tree Farm, located 12 miles east of Madison, is owned by Joe Arington. The property is in its first decade and first generation of a 100 year plan that is meant to produce a variety of sustainable agriculture and silviculture products. Being in its first generation, Arington Tree Farm offers a unique blend of forest and wildlife habitat, from seedlings to mature bur oaks, from marsh to mature hardwood stands.

The fact that the property is a certified property by the nation's oldest and largest forest conservation program in the United States, the American Tree Farm System(R), will ensure that the carbon benefits of the trade last.

Approximately 4,000 seedlings obtained through the Wisconsin Department of Natural Resources are being planted on a four-acre site at Arington's Tree Farm with another 16 acres planted with thousands of oak and walnut trees, with the seed provided by Arington.

"Every game day, a crowd larger than many Wisconsin cities gathers at Camp Randall Stadium to watch Badger football," says associate athletic director Vince Sweeney. "It's important for us to be environmentally conscious in what we do and to spread the word about how everyday actions can lead to a cleaner environment." He also hopes that this will help others to do the same.

Carbon trading for football games is a relatively new phenomenon. The University of Georgia and Florida State have also engaged in this environmentally friendly program.

The UW-Madison project has two aims: to offset carbon dioxide emissions generated directly by activities surrounding the game, and to make a continuing investment in a healthy environment by planting trees. Plants and trees absorb carbon dioxide from the atmosphere as they grow. So planting trees or preserving forests helps offset the carbon dioxide produced by all the other things we do that consume energy.

The university will work with the nonprofit Delta Institute Carbon Offset Program, and credits will be purchased on the Chicago Climate Exchange to offset those emissions. When credits are purchased on the exchange, the money is invested in other projects that offset emissions by a corresponding amount.

The American Forest Foundation (AFF) is a nonprofit 501 (c)(3) conservation and education organization that strives to ensure the sustainability of America's family forests for present and future generations. Our vision is to create a future where North American forests are sustained by the public, which understands and values the social, economic, and environmental benefits they provide to our communities, our nation, and our world.