Energy Risk European Emissions House of the Year: Deutsche Bank

European Emissions House of the Year: Deutsche Bank

Energy Risk Awards 2011

A continued presence in less-liquid carbon markets such as the Clean Development Mechanism (CDM) beyond 2012 and European Union Allowance (EUA) trades out to 2020, combined with pioneering deals such as a financing for energy efficient light bulbs in Ecuador and a suite of emissions-linked investor products has earned Deutsche Bank our European Emissions House of the Year award.

Deutsche Bank is involved in more than 84 CDM and Joint Implementation projects in 16 countries that have total expected reductions of more than 215 million tonnes of carbon dioxide equivalent to the end of 2012, according to carbon consultancy Thomson Reuters Point Carbon. Moreover, its market share has increased as the number of banks active in carbon has dropped significantly in the last couple of years due to the financial crisis.

"On the primary market, we remain the largest bank in each of the regions - Africa, Asia and the Pacific, Eastern Europe, and Latin America and the Caribbean - and we have expanded our market share in Asia," says David Costa-D'sa, head of environmental financial products structuring at Deutsche Bank.

Many of the bank's competitors have also stepped back from the market because of regulatory uncertainty. After governments at the December 2009 Copenhagen climate change summit failed to agree on a global deal to replace Kyoto, many dealers ceased activity in the CDM market in Certified Emissions Reductions (CERs) beyond 2012. Deutsche Bank continued however, and is now one of the few dealers to make markets in primary and secondary CERs beyond 2012, providing support for many long-term emissions reduction projects that would otherwise have struggled to continue.

It has also made a long-term commitment to the market for EUAs. Deutsche Bank has shown prices and got trades on its books with clients out to the end of phase III of the European Union Emissions Trading Scheme (EU ETS) during 2013-2020, even though the details of that phase are still under discussion and liquidity does not extend that far out on the exchanges.

"When you look at the European Climate Exchange, there's no cleared volume at 2016-17 and beyond, but we do over-the-counter transactions. We have quoted and executed transactions out to 2020, and they are very specific tailored OTC transactions. We've shown prices and have got genuine trades on the books with our clients out to the full extent of phase III of the EU ETS," says Martin Lawless, head of environmental financial products at Deutsche Bank.

The emissions team argues it can face this regulatory uncertainty because its longevity in carbon trading provides it with a track record for management that those who have entered the market more recently do not posess. "Our managers have the confidence in our business to allow us to be more expansive; to transact out to 2020 in the primary and secondary markets and to be looking at expanding into Australia, New Zealand, California, Japan and possibly South Korea," says Lawless.

The bank was an early starter in carbon trading, active since its involvement in the World Bank's first carbon fund in 2000. Over the decade since then, a key part the bank's portfolio strength has been through its work with the public sector, which in turn brings it business with the private sector. It has executed transactions with the governments of Mexico and Luxembourg, among others, and given advice to the UK and Japan.

The team's ability to conduct innovative transactions with governments was demonstrated in June last year, with a contract signed with the government of Ecuador (see Deals of the Year coverage in Energy Risk's March 2011 issue). The deal finances the distribution of energy-efficient light bulbs to poor households in the country. Under a forward contract, Ecuador sold to Deutsche Bank the emissions credits that it would receive from the UN for its distribution of the 6 million light bulbs to 1.5 million households. This is the first project of its kind to get approval from the CDM Executive Board, and the first carbon credit transaction of the Ecuadorean government.

On the investor side, the bank's emissions-linked products franchise continues to expand, with several large notes structured for real money investors such as pension funds.

This diverse client base, combined with geographic reach and an established role in both flow and origination, have helped the emissions desk achieve consistent financial performance. "We do believe we are the most consistent and highly performing emissions business in Europe. We feel we have maintained our performance year after year," says Lawless.

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