Note d’étude Mission Climat
24 Pages
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Note d’étude Mission Climat

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24 Pages
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Research report no. 3, 20 June 2005 Romain Frémont +33 (0)1 58 50 79 52 romain.frémont@caissedesdepots.fr CO emissions exchanges and the 2functioning of trading systems The various CO emissions exchanges in Europe 2 Nord Pool ECX EEX Climex Powernext EXAA Sendeco2 CO emissions trading first began at the end of the 1990s, as awareness of the 2challenges posed by climate change grew. Prior to 2005, these transactions occurred over the counter, with no organised market system. The launch of the European emissions trading scheme has changed everything. The market’s scale has grown exponentially, with a total volume of more than 2 billion metric tonnes in emissions allowances allocated to industry. The launch of several emissions trading exchanges is therefore designed to provide liquidity and organise the market. This report looks at the six proposed exchanges as at mid-2005 and the conditions for their success. 1I. The overall challenges for exchanges With the entry into force of European Directive 87/2003, the first international CO emissions allowances trading scheme was launched on 1 January 2005 in the 2EU-25. This scheme enables various participants to trade emissions allowances based on their needs, which should minimise the overall cost of the effort to fight climate change. Beginning in 2008, it will be integrated into the larger system established by the Kyoto protocol. The ...

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CO2emissions exchanges and the functioning of trading systems The various CO2emissions exchanges in Europe
Nord Pool
EEX
 Research report no. 3, 20 June 2005  Romain Frémont +33 (0)1 58 50 79 52 romain.frémont@caissedesdepots.fr                           CO2 emissions trading first began at the end of the 1990s, as awareness of the challenges posed by climate change grew. Prior to 2005, these transactions occurred over the counter, with no organised market system. The launch of the European emissions trading scheme has changed everything. The market’s scale has grown exponentially, with a total volume of more than 2 billion metric tonnes in emissions allowances allocated to industry. The launch of several emissions trading exchanges is therefore designed to provide liquidity and organise the market. This report looks at the six proposed exchanges as at mid-2005 and the conditions for their success.  
ECX Climex Powernext
Sendeco2
 
EXAA
1
 
 
I.The overall challenges for exchanges   With the entry into force of European Directive 87/2003, the first international CO2allowances trading scheme was launched on 1 January 2005 in the  emissions EU-25. This scheme enables various participants to trade emissions allowances based on their needs, which should minimise the overall cost of the effort to fight climate change. Beginning in 2008, it will be integrated into the larger system established by the Kyoto protocol.   The launch of this market has been gradual, in particular as a result of the longer-than-expected period needed to allocate the allowances to installations and record them in the national registries. The nominal amount of these transactions has nevertheless increased substantially as a result of increases in both trading volume and market prices. The depth of the market offers a source of potential revenues for intermediaries (brokers) and exchanges.    250
  
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EU carbon market growth
20 18 16 14 12 10 8 6 4 2 0 Jan. 2005 Feb. 2005 March 2005 April 2005 May 2005 Market value (in M€) Price (€ / tonne)
 
Source : Point carbon daily
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A. Exchanges and registries   In terms of market organisation, at least two conditions must be met for a CO2 emissions trading scheme to work properly. First, the emissions and respective allowance amounts must be tracked reliably and securely. This role is played by the registries. Second, the market requires sufficient liquidity to promote trading among participants and provide them with accurate pricing information. That role is played by the exchanges.  The national registries ensure that allowance ownership transfers are properly recorded. In effect, these registries constitute the general ledger for the emissions trading system. For an allowance ownership transfer to be valid, it must be recorded in one of the 25 national registries. These transfers occur in real time, and the ownership transfer may not be confirmedex ante. In other words, a registry does not contain forward transactions; only spot trades may be registered. The registry accounts are based on CO2equivalent amounts. They contain no reference to price or the allowance value, in accordance with the terms of the Kyoto protocol. By ensuring the traceability of emissions allowances in volume terms, they ensure the environmental integrity of the trading system.  The market’s liquidity is ensured by several factors, the first of which is the number of allowances issued and traded. It is ensured by the financial intermediaries such as brokers, and can be facilitated through exchanges. These centralised electronic exchanges match up allowance buy and sell orders. Their main function is to contribute to the market’s liquidity, and they must offer their clients several advantages:  ƒ lower trading costs (no costs to finding a counterparty, negotiating prices, etc.);  ƒ reducing default risk;  ƒ of anonymity for participants; guarantee  ƒ execution of transactions; rapid  ƒ of average transaction price. transparency   Exchanges and registries are therefore closely linked, as the former need the latter to ensure the smooth execution of their transactions. This link between registries and exchanges may be further solidified through a privileged relationship, or even a partnership agreement, with a specific national registry. That is the case for three of the six projects launched simultaneously on the European market (EEX with the German registry, EXAA with the Austrian registry and Powernext with the French registry).    
 
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 B. B. Different market models depending on the project   No fewer than six exchanges are looking to start trading CO2 emissions allowances in Europe: the Norwegian exchange Nord Pool, Germany’s EEX, the Amsterdam-based ECX (a subsidiary of the Chicago Climate Exchange), the French exchange Powernext, Austria’s EXAA and the Dutch exchange Climex.   These exchanges all have certain points in common:  ƒ are all run by the energy market operators of their respective countries They (four electric utilities, green certificates in the case of Climex, and the IPE for ECX). The energy utilities’ entry into this new market is logical, since power companies account for nearly 60% of European CO2emissions;   ƒ those discussed in this  Allreport are offering trading contracts on EU allowances. The Dutch exchange operated by Climex would like to expand its model by integrating CO2 credits issued through the Clean Development Mechanism created under the Kyoto Protocol (CERs). Nevertheless, it is unlikely that CERs will be transferred to a European registry before 2007, given the architectural limitations of the international system;   ƒ All these exchanges are electronic and based on an order matching system whose effectiveness has been proven in the energy market;   ƒdecided to specialise in one type of product and do not offer a have  They complete range of products and services.   In spite of these common attributes, several major differences between the exchanges exist, in particular:   ƒ have different target markets, as some are focusing on large industry, They whereas others (e.g. Climex) are basing their strategy on smaller customers;   ƒmodels, as a major distinction can be made They have contrasting market between exchanges offering derivatives (forwards and futures) and those offering spot contracts;   ƒ Sometransfer a portion of their allowances through a require their clients to specific registry (Powernext, EEX, EXAA), even though they ensure delivery of the allowances throughout Europe;
 
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 ƒ Some registries require an ownership transfer from the allowance seller to the exchange (EEX), which has non-negligible accounting and tax implications;   ƒ the proposed listing methods contrast between fixing1 (EEX, EXAA) on the one hand and continuous trading on the other (Powernext, ECX).     Table 1: the various market models    Climex ECX EEX EXAA Nord Pool Powernext  Contract offered at the Spot Futures Spot Spot ForwardSpot start-up OTC clearing Yes Yes Yes No YesNo Trading model Continuous Continuous Fixing Fixing ContinuousContinuous
Hours N/A 8 - 17:00 10 - 10:05 15 -15:30 10-15:3010-14:30 Working Working Working 2nd& 4th days WorkingWorking Trading days days days days Tuesdaydays Nominal amount 1t 1,000t 1t 1t 1,000t1,000t
Agreement with No No Yes Yes NoYes national registry Clearing APX ClLeaCrHn et EEX AG EXAA Nord Pool ASA CDC Delivery Day +1 Day +3 Day +2 Day +1 Day +3Trading day
Start date N/A 22 April 05 9 March 05 June 05 11 February 05 24 June 05
                                                         1end of this report for definitions of the terms used.See the glossary at the
 
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 C. Start-up and activity of the exchanges  The start-up of the exchanges is closely linked to that of the registries, which in turn often depend on the finalisation of the National Allocation Plans. Thus it comes as no surprise that the Scandinavian exchange Nord Pool was the first to begin operations at 11 February 2005, since the registries for Denmark, Sweden and Finland were also the first to become operational.   The Dutch registry was also among the first four to become operational, which no doubt facilitated the start-up of the ECX exchange in Amsterdam. The first futures contracts on CO2 emissions allowances were launched on 22 April 2005 by EXC and IPE.     Start-up of exchanges in 2005         11 February 9 March 22 April 15-30 June 2ndhalf  Nord Pool EEX ECX PWX & EXAA Climex
   The third exchange able to commence operations was the EEX. On 9 March, the German exchange launched its spot contract and listing system of morning fixing. At the start, EEX acted so as to keep its activities independent of the registry by having its members enter into agreements to sell their emissions allowances in the future once they have been allocated in the German registry.  The three other exchanges have pushed back their start-up dates for various reasons.  EXAA’s launch is tied to that of the Austrian registry, which encountered difficulties obtaining final accreditation from the European Commission. The exchange could begin operations in the second half of June, according to the most recent information available.  Similarly, Powernext tied its start-up to the online launch of the French registry, which occurred on 16 May. Therefore the launch ofPowernext Carbondid not come until the latter half of June.    
 
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Climex had initially planned to begin operations in March, but had to push back the date because of implementation delays. Climex would like to achieve critical mass in terms of participants in order to avoid an EEX-type scenario. The Dutch exchange is also waiting for a sufficient number of allowances to be allocated in the various registries of the target countries (United Kingdom, the Netherlands, Belgium, France, Germany and Spain).  The growth in trading volume on the exchanges occurred very gradually in the first half of 2005. Several factors contributed to this slow start, including difficulties in setting up the registries, the lack of available liquidity and a wait-and-see attitude by participants in this new market. For now, the exchanges offering derivatives have recorded the largest trading volume. The Nordic Power Exchange (Nord Pool) leads the way in trading volume. With a one-month lead over its rivals, Nord Pool had traded more than 3.1 million tonnes of CO2 allowances by 31 May 2005, to which should be added another 0.5 million tonnes on the OTC market. As at 28 April, the Norwegian exchange had 43 members. The first trade involved EDF Trading and Statoil ASA.  The ECX had a successful opening, as more than 340,000 tonnes were traded in the first week, to 22 April, representing nearly one-third of its trading volume to date. By 31 May, more than 1 million tonnes had been traded on the ECX.  The spot market began slowly for the EEX. By 6 May, only 150,000 EUAs had been traded as spot contracts on the EEX. By 31 May, approximately 250,000 tonnes had been traded on the German exchange2. The EEX’s start-up difficulties can be attributed in part to the problems experienced by the German registry but also to its market model. This model is not simple, and it requires that participants transfer part or all of their allowances to a global account managed by EEX, which has tax implications for the participants.  Overall, more than 4.4 million tonnes have been traded on the various exchanges operating. By 31 May, Nord Pool had accounted for 72% of the trades made on exchanges, compared with 22% for the ECX and 6% for the EEX.  
                                                 2cited in this report were provided by the exchanges in their reports to Point CarbonThe figures (Carbon Market Daily and EEX / ECX / Nord Pool daily update)
 
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Traded volumes on trading platforms (between 31/01/2005 & 31/05/2005)
Volumes ('000' tonnes) 50 000 46,456 45 000 40 000 35 000 30 000 25 000 20 000 15 000 10 000 5 000 0 Total volumes Traded  ECX EEXNord Pool Climex Powernext EXAA (EUAs all volumes on vintages) trading platforms 
4,439 3,119 1,070 250
 Today, the exchanges account for only a limited share of the total trading volume in emissions allowances. Since the beginning of the year, less than 10% of all transactions have gone through an exchange. The vast majority of the trading volume in this new carbon market has been handled by brokers specialising in this activity: TFS, Natsource, Evolutions Market, CO2e.com, and ICAP Energy Ltd. The brokers performed the first trades in this market, whether they be forward or spot contracts (e.g. trade involving EUAs between Shell and Energi E2 on 7 February).    D. D. Rates: remaining competitive  The various exchanges have very different rate structures. Some are based on membership fees and high annual fees, while others integrate the clearing fees into the trading commissions. All the exchanges, however, base their rates on trading volume, with lower rates for higher volumes. Another noteworthy point: in response to competition, Nord Pool reduced its rates on a permanent basis, while ECX lowered its rates on a temporary basis for 2005.
 
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Table 2: applicable rates on the various exchanges    Climex ECX EEX EXAA Nord Pool Powernext  €0 for €0 for IPE existing Membership fees 0 amned mb2e,r5s0 0  7,500 1,100 amnedm b6e,r1s8 3 €0 3 for others for new members €0 for €1,200 /members and €3,600 / €4,000between Annual fees €0 €0 €12,500 €9,600*na  03 d005,r0o0f, 1 others* Account fees €0 €0 €0 €100 €0€4,000 tCoonmnem /i slosit on per 200%. 00 14 */ t an2 d me2.m5b /e lrost €0.04 / t0.005/t .0 / 60 0.  /12From 3 to 2 . €0 03*cents / t* . Syesrt teemr maicncaelss fee 0 $38 7,800 N/A 371  N/A  €1 fCeleesa r ing membership 0 220 a0n5d / lot 0 0 618  €0 €371 for *A*nnual clearing fees 0 0 0 0 non-€0  members Clearing fees 0*** (220 a0n5)d  / l1o t €0.01 / t / t €0.01 €0***€40 / trade €60,000 / 3 €20,000 / p  y4e0a,r 000 / years year Ca   * Based on annual trading volume ** Does not include new account fees *** Clearing fees included in trading fees    The significant differences in the rate structures make comparisons between exchanges difficult. Moreover, we are not including information on management fees for margin calls for participants or accounting processing costs on forward contracts. Nevertheless, the following graphs attempt to provide such a comparison based on the information summarised in table 3.                                                   3 Some Nord Pool prices are quoted in Norwegian Krone (NOK). They were converted into euros at the rate of €0.12367per NOK as at 16/05/2005  9
35 000 € 30 000 € 25 000 € 20 000 € 15 000 € 10 000 € 5 000 € 0 €
7 000 € 6 000 € 5 000 € 4 000 € 3 000 € 2 000 € 1 000 € 0 €
Comparison of transaction costs on various exchanges Scenario 1: first transaction of 75,000 tonnes for a non-member 31,550 €
12,669 € 9,200 € 7, 290 €
2,868 € 750 € EEX Nord Pool EXAA Powernext ECX Climex
Comparison of transaction costs on various exchanges Scenario 2: second transaction of 100,000 tonnes for a member
6,000 €
EXAA
5,000 €
3,040 €
1,500 €
1,000 €
EEX Powernext Nord Pool Climex
 
480 € ECX
 
 
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 Table 3: Assumptions for cost scenarios  Member of the exchangeNot for the first transaction Number of access points to system1 Average annual emissions trading600,000 Transaction1 transaction of 75,000 allowances (75 lots of 1,000 tonnes) and a second of 100,000 allowances Date of trade16/05/2005 EUA price€16.75 Spot contractClimex / EEX / EXAA / Powernext Forward contractNord Pool Futures contractECX Rate in NOK at 16/05/2005 €0.12367   The two graphs clearly indicate that for relatively limited annual trading volumes and transactions, ECX and Climex are the least expensive. By comparison, EEX and Nord Pool offer less competitive rates at comparable volume, largely as a result of their very high entry fees. Once these entry costs have been paid, however, these exchanges are more competitive and the various exchanges offer pricing terms that are relatively close to one another for members with significant trading volume.   The outlook: consolidation likely?  Along with the quality of services provided, the underlying rate elements will be major competitive factors for the exchanges. Competition could indeed be fierce among the various market models being implemented.  The market nevertheless remains in a premature development stage, and its depth should be kept in perspective for the initial period (2005 – 2007). If we use the assumption often cited by some analysts that only 10% of European allowances will be traded, or 200 million tonnes per year (out of a total of approximately 2 billion tonnes allocated per year), this represents barely a half day of transactions on the CAC 40 at a price of €15 per tonne!  In the future, however, the trading volume could become more substantial. Some analysts believe that the market could reach more than €10 billion per year beginning in 2008.   
 
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