Emissions Market group to build carbon reductions portfolio and rating system

As governments continue their climate change negotiations in Morocco, the world’s major energy and financial services companies has completed the first phase of an initiative that seeks to stimulate the new global financial market in carbon.

The Emissions Market Development Group (EMDG), launched one year ago at the United Nations climate change conference in the Hague (COP6), achieved its first major milestone with the completion of a feasibility study on designing a Carbon Repository and related facilities. Based on the study, EMDG will move forward with building mechanisms aimed at developing a commodity for international trading of greenhouse gas reductions.

EMDG Ltd., formed by Credit Lyonnais, Natsource and Swiss Re, commissioned the study on behalf of a group of Participant companies including emitters, insurers, banks, brokers and accountants. The feasibility study was carried out by Andersen.

“As governments continued their task of fine-tuning rules for the Kyoto Protocol, EMDG emerged as a prime example of the private sector seizing the initiative to turn climate action into financial reality,” noted Frank Joshua, Andersen’s Global Director for Emissions Trading. “To do that, companies need better risk management solutions, especially if they have facilities in many countries. For example, how should they deal with risks about whether greenhouse gas reductions made in one location will be good for compliance in other jurisdictions?”

“We wanted to test a new business prospect for addressing these risks,” said Jack Cogen, Natsource’s President. “We envisioned creating a Carbon Repository that would issue a new carbon commodity in exchange for a company’s reductions-and after applying an array of risk management techniques, the new commodity could be guaranteed for use in qualified jurisdiction.”

The EMDG study determined that, under certain conditions, it would be technically feasible to design a commercial Carbon Repository within the emerging international carbon trading market. As designed, this Repository’s role would be to exchange verified emission reductions for guaranteed “gold standard” carbon securities, which could later be redeemed for valid compliance units in specified national jurisdictions.

Importantly, in order for the Carbon Repository to become technically feasible, the study highlights a set of risk management solutions that must be developed and put in place. These solutions include, inter alia, a Carbon Rating Engine, a market risk model, insurance products and mutual recognition agreements with governments. (A public version of the study’s Executive Summary is attached).

“The concept of the Carbon Repository together with the building blocks identified in the Feasibility Study will greatly enhance the fungibility of greenhouse gas emission reduction credits and thus allow the reductions to be managed in a much more cost effective way,” noted Dan Hoffmann, Director of Swiss Re New Markets.

“The work carried out in the Feasibility Study lays the foundation for the creation of a Carbon Repository that we believe will be a key requirement to the successful commercial response to the Kyoto Protocol,” said Liam O’Keeffe, Credit Lyonnais’ Head of Project Finance in London.

With the successful completion of the feasibility study, the Participants agreed to continue to push the initiative forward with a view to the eventual commercial launch of the Carbon Repository concept. It recognized several business innovations that needed to be nurtured into full development. To that end, the Group will now give priority to the following initiatives:

* Create a diversified portfolio of “verified emission reductions” (VERs) that would help companies manage their carbon risk more effectively;

* Design, build and test a Carbon Rating Engine to assess the financial value of emission reduction units;

* Establish mutual recognition agreements with selected jurisdictions in order to enhance inter-jurisdictional fungibility (i.e. cross border transfers) of carbon credits;

* Support the development of corporate financial accounting rules and guidelines for carbon trading, and

* Establish an “open forum” to facilitate the exchange of ideas and promote co-operation with governments and non-governmental organisations (NGOs).

“DuPont, like other EMDG companies, is making great strides in reducing greenhouse gas emissions at facilities we own throughout the world,” noted David Findlay. “The EMDG project contains an approach that enhances our ability to manage reductions achieved in various countries, helping us assure solid compliance everywhere we operate – at a lower cost. Simply put, if its initiatives move forward and run well, EMDG could help save us money – and enable us to do more good for the environment.”

The Group also decided that the time has come to broaden its membership base. Participation will now be open to companies from other emitting sectors such as steel, cement, aluminium, refining, transport, mining, pulp and paper and forestry (in order to test a prototype of the rating engine), as well as from the financial sector (banks, funds and insurance companies), verifiers, traders, rating agencies and software developers.

“Innovation is the heart of EMDG. It is a group of businesses doing what we do best – preparing to address climate change by producing innovative business ideas,” said Bob Page, TransAlta’s Vice President for Sustainable Development. “I’m convinced that the initiatives coming out of EMDG will help shape the carbon market to operate better, faster and cheaper – not a bad combination.”

Frank Joshua, Andersen’s Global Director of Emissions Trading, said: “This study provides evidence that the world’s key emitters and leading financial institutions are taking action to develop the market conditions needed to make the fight against climate change financially viable, and even financially desirable.”

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